Fuel Innovation with Disciplined Value Capture. Kalypso White Paper by Brian Sharp, Greg Adkins and Kevin Lemke

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1 Fuel Innovation with Disciplined Value Capture Kalypso White Paper by Brian Sharp, Greg Adkins and Kevin Lemke

2 Fuel Innovation with Disciplined Value Capture Innovation. Simple word. In most companies, innovation means establishing the organizational capability and capacity to create breakthrough products or services which customers need (whether they know it yet or not). Innovation and creation are intertwined in terms of mindsets and behaviors. Companies are consumed with creating valuable things their customers need. When businesses get it right, it s a fuel that s in high demand. This may come as a surprise, but many incredibly creative companies actually struggle to capture the value of their creativity. Markets tend to be harsh. Unless businesses have put as much effort into value capture as they have value creation (i.e., new product development processes), significant profits are lost in their creative toil. Figure 1: Typical product life cycle versus accelerated product life cycle in high tech, in relation to product sales. Typical Product Life Cycle Accelerated Product Life Cycle in High Tech Product Sales Product Sales In order to sustain innovation, companies need to put as much thought and effort into value capture as they do value creation. Coming up with product customers need is only half the battle of innovation. Ringing the register on the value created is the other piece. To do one without the other is to fail at innovation. Where Is Value Capture Linked to Product Innovation? The pace of product innovation and commercialization in the high tech space is astounding. Every month, thousands of products and upgrades hit the market. The creative engine behind the pace of technology is mind boggling and the pace seems to increase at a nearly exponential pace. The supply of groundbreaking customer solutions is outmatched only by the ever increasing appetite of the global marketplace. Conventional wisdom says that with so many competitive alternatives and the constant flow of product innovation, the market s willingness to pay hits its limit and pricing pressure increases. This means that companies with the most efficient and effective processes for capturing the value inherent in their products will be able to consistently funnel more money back into product development to sustain their innovation engine and competitive advantage over the long haul. Unfortunately, many companies overwork Time value creation and undergun their value capture efforts. Capturing value means having the processes and capabilities in place to ensure the full profit potential is achieved for each incremental improvement or enhancement in a product. Companies that have not invested properly in value capture capabilities get hammered by the market. Competitors are trained to commoditize on price. Customers get a free pass Fuel Innovation with Disciplined Value Capture 2

3 to enjoy the differential value of the new innovation. The marketplace of competitors and customers drive behavior and expectations which corrupt the rewards and investments required to sustain innovation. A company s innovation and commercialization capabilities are their growth engine. Savvy marketing and aggressive pricing can only take a company so far. For long term growth and competitive advantage, companies must continue to fuel the innovation engine. And profit is that fuel. Why Is Value Capture the Right Lever? Very few businesses possess the quantitative tools and methodologies to assure they are getting the full profit potential out of their innovations, much less the incremental improvements in their offering. Two of the most critical capabilities are charging for and receiving the most value from a product. Charging for entails setting the correct price and the proper set of guidelines for customer discounts and concessions. It also involves having the infrastructure and set of capabilities in place to repeatedly assess the competitive landscape, customer needs and internal constraints to formulate offers that achieve the desired level of profitability. Receiving the correct amount of money involves an investment in business process that ensures that the amount quoted matches the amount paid by customers at the time payment is due. Both sets of processes are critical to any business survival. Optimizing these value capture processes is what sets companies apart from the pack and leads to sustainable growth. A hypothetical example: assume two companies launch their storage devices at the same time. Product performance and specifications are essentially the same. Company A has invested in robust pricing and value capture capabilities which allow them to accurately set a list price and discount guidelines, and has effective systems that allow for accurate processing of orders and all the related price attributes. Company B, on the other hand, does not manage a list price and approaches each customer opportunity in an ad hoc and reactive manner. Further, their internal systems are incapable of enforcing and processing the price for the order that was approved and offered to the customer. In summary: List price management Segmented discount guidelines Value selling expertise Order management Company A Yes Yes High End-to-end Company B No No Low Manual Figure 2: Comparison of two companies with different value capture approach. In this case, Company A will have higher and more predictable value capture on average. But what will differentiate the companies is their long term performance? Company A now has a distinct edge in the ability to fund activities that will improve their growth prospects particularly product innovation and development. 3 Fuel Innovation with Disciplined Value Capture

4 What Are the Hurdles? In the high tech space, there is greater urgency for value capture optimization due to these unique challenges: Powerful buyers Intense competition Short lifecycles Declining price curves for end products Complex go-to-market paths An historical bias toward marketing speeds and feeds versus customer benefits This combination of factors heightens the need to make accurate and timely pricing decisions, and to be effective in managing the processes required to make offers and execute them through internal systems without error. Historically, companies have addressed value capture in three ways. First, by standing up a small pricing team that has relatively little authority compared with the amount of revenue and profit they oversee. Second, by investing in pricing execution software that automates the quoting and pricing approval processes. These first two efforts are important and critical. However, results are often diluted by the lack of true process and behavior change which neither effort is capable of driving. These pricing teams are consumed by administering an approval process when their true value-add should be in collaborating with the sales teams to craft product and pricing solutions that meet customers needs, and which provide the company the profit margins it needs to fuel the engine. The third way that companies have traditionally addressed value capture is by focusing on the cost side of the profit equation. However, focusing on costs typically results in a downward spiral of ever more Draconian steps to find redundancies and extract concessions from suppliers. This is not a sustainable mode of operation because when all areas of cost improvement are exhausted, companies often eventually turn to the R&D and product development activities that led to success in the first place. The Impact of Poor Value Capture Practices If revenue and profit are the fuel, then poor value capture practices are akin to leaking gas on the ground. This insidious leakage can come from many diverse areas. For example: Sales reps only focused on the top line request discounts far below what the competition is offering to make doubly sure they win the deal Rebates are paid to channel partners who have not performed agreed-upon activities Fuel Innovation with Disciplined Value Capture 4

5 When an order is placed, systems are unable to verify that a particular price has been approved The competition makes a price reduction and the company is slow to react, thus losing sales These are just a few of the sources of leakage to which a company may be exposed. But it is clear from this short list how many functional groups and systems are involved and how much cross-discipline coordination is necessary to begin staunching the flow of money draining out of the company. Rewards Are Immense; Approach Must Be Comprehensive and Coordinated Now think about another example. Say that the average selling price at a company is $35. Intuitively, is it reasonable to get on average $.25 more per sale by addressing sloppy practices and reducing leakage? It would be difficult to find anyone in the company who understands the market and internal processes that would deny this opportunity (and more!) exists. For a $10B company, that $.25 translates to $71M annually in incremental revenue and profit. Revenue Selling Price Units Incremental improvement per unit Total improvement $10B $35 $286M $0.25 $71M Figure 3: Incremental improvements can result in higher revenue. In fact, that money is there and waiting to be extracted. Companies have begun opening their eyes to this untapped profit pool. Returning to our previous Company A/Company B example, Company A s more predictable value capture and ability to fund future innovation will also result in an increase in profit. Company A, with sustainable value capture practices in place, is likely to experience a revenue increase of 40% or more. To effectively capture value on a sustainable basis requires a thoughtful approach and organizational commitment. Successful companies are doing that by managing an end-to-end pricing process that includes: Creating a repository of competitive and customer information Setting list price and any discount or concession guidelines Communicating that price and value proposition internally to the sales teams and externally to partners and the market Managing any necessary discounts or concessions to ensure that the price/discount/concession given is what was intended 5 Fuel Innovation with Disciplined Value Capture

6 Managing the data flow of a customer order from initial quote to receipt of payment Analyzing results and correcting course in a timely manner It s easy to say that high tech companies need to invest in these end-toend value capture capabilities to address their unique challenges. However, making the necessary changes is truly a transformational effort requiring a thoughtful approach, engaged stakeholders, and committed executives. Financial benefits are substantial and can begin to be realized in the near term. The Complete Value Management Solution Effective price and value management is one of the most critical challenges facing innovators today. With buyer demands increasing, industry competition intensifying, and development cycle times decreasing, companies are struggling to keep pace in delivering commercially viable products and services. To truly succeed at innovation, both value creation activities and value capture activities need to be managed and coordinated aggressively. With the right coordination, companies can bring products and services to market that meet customer, profitability, and market share expectations. A comprehensive Value Management solution should be a multi-faceted set of processes and disciplines that allows companies to extract the value created by innovation and commercialization activities. Best-in-class Value Management processes instill behaviors and capabilities that allow companies to charge and receive the amount of money that corresponds to the value their product brings to customers on a consistent basis. Company A, which has optimized these value capture processes with a comprehensive value management solution, will realize its innovation potential and set itself apart from the pack. Fuel Innovation with Disciplined Value Capture 6

7 Brian Sharp, Value Management Practice Leader, Kalypso Brian has over 20 years of international experience in product management, marketing, commercial development and sales. As Co-Leader of the Value Management Practice for Kalypso, Brian provides thought leadership and subject matter expertise related to pricing and value management, product commercialization, product line management and rationalization, branding and channel management. Greg Adkins, Partner and High Tech Practice Lead, Kalypso Greg brings over 25 years of professional experience as a business advisor, management consultant and senior executive in business strategy, innovation, PLM, and operations to Kalypso in his Partner role. As the High Technology Practice Lead and Energy Practice Lead, he focuses on working with clients to improve the effectiveness of their innovation, product development and product lifecycle management processes. Kevin Lemke, Director of Global Pricing at Freescale Semiconductor Kevin has over 17 years of marketing, operations, finance, product management and business development experience. Kevin is a longtime pricing practitioner with pricing and value management expertise in the electronics, semiconductor, chemicals, and travel/ hospitality industries. Prior to Freescale, Kevin worked at Kalypso, where he led corporate-level operational strategy initiatives including business process redesign, profitability optimization, competitive analysis, cost reduction, and customer acquisition. Prior to Kalypso, Kevin worked at Dell Inc., where he held various pricing strategy and operational roles, and Continental Airlines, where he was responsible for revenue management for all East coast routes. About Kalypso Kalypso is a consulting firm serving the world s most innovative companies. The firm helps clients to deliver on the promise of innovation. Service offerings encompass all aspects of innovation including product strategy, development, introduction, commercialization, lifecycle management, and PLM systems selection and implementation. In addition to the firm s deep industry, technology, operational, and training expertise, Kalypso provides a flexible, collaborative approach to deliver unparalleled client satisfaction. Products Ideas Innovation

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